Thursday, 18 October 2012

US ECONOMY (October 18th 2012): Unemployment Claims Spike - but DON'T TRUST THE HEADLINES, the TRUTH is less exciting

Last week we wrote an article on the subject of Weekly Jobless Claims, suggesting that the 339k reading (a multi-year low) might be considered the first sign that QE3 was being felt in the labour statistics.

You can read that here.

However, it was soon made clear that part of this was a technical difficulty, with some of the claims not being recorded in that data release.

There has been a lot of buzz this morning about today's release of Weekly Jobless Claims, which unlike last week, stand near the highest recording of the year, at 388k.

We'd like to very quickly clear up that neither 339k nor 388k readings can be considered normal or accurate, and that it would be more reasonable to simply say that an average of 365k was recorded across the two weeks.

The reason being, both the 339k reading (revised up to 342k) and 388k readings are distorted by a hangover in claims making last week seem too good, and this week seem too bad.

It's very simple, in our analysis, we'll consider 365k to be the last two weeks' worth of readings. Funnily enough, that is almost exactly what analysts had forecast for both weeks.

There is no conspiracy in the first week of 339k claims, and no rampant shocking increase this week, it is simply a glitch in the data. Please don't be fooled by the political headlines, or prominent figures trying to paint the data in any other way - sadly it is nothing that interesting. Just take both weeks as 365k, which is what analysts expected for both weeks.


Let's look at the chart as it will read in the record books, and the chart how we see it at BigMacroPicture (charts courtesy of the superb ForexFactory Calendar).

So we can still see the bullish downtrend in Claims until around February/March 2012 (350-360k). Then we see Claims spiking higher into the summer (365k-390k).

With last week's 339k reading, we had hoped a new trend of making new lower lows would commence, before we realised the technical error in the report.

With two readings of 365k instead, we must retract that statement for the time being. Not only have we failed to make a lower low in Claims since February (351k), Claims remain stubbornly high, with only very mild evidence of much recovery from the summer's 370k+ readings.

This is by no means a signal that things are worse than we expected, just that last week's analysis is invalidated until new genuine lows can be made in Unemployment Claims.

As such, we still wait for the first signs that QE3 is helping the US jobs market, which might only show up in the data after the US Presidential Election.


The market remains convinced that data points like these will improve over time, thanks to QE3, and that employment/consumer/business conditions will eventually start to improve in the data.

It began pricing that improvement in June, when equity market's bottomed - and has rallied to 2012 highs, even if that isn't too shocking from a valuation point of view.

Despite this, there are still a lot of factors suppressing equity markets at the moment, in terms of guidance (often a backwards-looking indicator), earnings (for a quarter we knew would be disappointing), skepticism over the global economy, and worries over the US fiscal cliff.

So there is still room for US equities to move higher if the data does start to improve - especially if the Presidential Election goes off without a hitch and the "fiscal cliff" issue is resolved.

However, it is highly likely that to some extent, the market is already partially assuming the data improves and the issues are resolved. The "no improvement in data" and "no fiscal deal" scenario would still serve as a serious risk to equity markets at these levels - so it is worth being patient and cautious with position sizing.

As ever, we'll continue to provide up to date analysis of these important economic indicators as they are released, and analyse the implications for investors and traders.

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